IRS Publication 17 is a nice fat booklet published by the Internal Revenue Service which explains in detail everything you’ll ever want to know about your federal individual income taxes. It’s almost 300 pages long and the Alternative Minimum Tax is briefly discussed on half a page of the publication. While Pub 17 gives a good overall view of the AMT, the instructions for IRS form 1040 give a better in-depth explanation of the AMT. The IRS form for figuring and calculating the AMT is also helpful: IRS Form 6251.
IRS Publication 17
What’s really nice about IRS Publication 17, however, is that it’s written in some nice plain English. How’s that for a change at the IRS? Soon you won’t be needing people like to to interpret what’s going on over there at the IRS! Well that day’s still a bit far off so let’s take a look at Pub 17 and the Alternative Minimum Tax.
Pub 17 does a good job of nutshelling the concept of the AMT:
Tax law is complex. One idea that makes our tax system so hard to understand is all the little types of income that receive special treatment under our tax code. Every year, lawmakers and people that affect policy lobby for special treatment of their constituents. For example: a group might want income from rental properties to be tax-favored income so they can save money on taxes. This group might be comprised of oh, let’s say…landlords? Yes, everyone would like to change the tax code to benefit his or her own type of income. Well some people do get what they want..usually the rich and powerful people who have lots of influence over how tax code gets written. That would be…Big Business.
Tax-Preference Items & Pub 17
So, back to Publication 17 and the AMT. Now, after 100 years of writing special treatment of certain types of income into our tax code, we have the world’s most complicated income tax. We also have a myriad of ways for people to loophole themselves out of paying their fair share of federal income taxes.
That’s because while lawmakers have been busy writing into law special treatment of certain types of income, they’ve also been busy writing into law all sorts of deductions to income as well. We can deduct all sorts of things now from our taxable income. In addition to income adjustments which leave certain types of income off the taxable total, now we’ve also got more ways to remove money from the total: things you spent money on.
Tax-favored expenditures like medical expenses, state and local taxes, and depreciation can be subtracted from your Adjusted Gross Income as well.
So, through these types of adjustments, it’s possible for some wealthy people with smart accountants to whittle down their income tax liability to almost nothing.
Enter the Alternative Minimum Tax (AMT). The AMT comes in and says
Put back those tax preference items and adjustments to income!
With the addition of certain tax preference items (e.g. state and local taxes) there is an alternative tax and if it winds up being more than the regular tax it’s the one that counts. That, in a nutshell, is the AMT as described by the AMT.